Europe Adjusts to Group II

FLORENCE, Italy - As global base oil capacity continues its shift from API Group I to Group II base oils - along with rapid growth in Group III - European blenders and Group I base oil producers are taking steps to adapt to the changes, an industry observer told ACIs European Base Oils & Lubricants Interactive Summit here.

A couple factors are driving the transition from Group I to Group II in Europe. The European Automobile Manufacturers Associations 2016 sequences - with which all ACEA registered motor oils must be compliant - went into effect Dec. 1, and ACEA 2018 sequences are expected to go into effect by the end of 2020. These tests are making it increasingly difficult for Group I oils to pass, Catherine Caulfield, Argus Medias senior reporter for European base oils, told the audience at the summit, held Nov. 28-29.

Plus, the Technical Association of the European Lubricants Industrys quality control label, the European Engine Lubricants Quality Management System, enacts random testing to make sure engine oils are compliant. These testing bodies are ensuring that what is advertised is in fact what is in the can, Caulfield said.

Group I prices, according to Argus, are likely to be volatile - whether because of reduced demand and oversupply leading to lower prices, or because of shortages driving prices higher. No matter the case, this could lead to Group II prices that arent actually reflective of Group II market dynamics, but rather Group I pricing, leading to a market disruption.

Supporting the shift to Group II will be an increased supply of it. ExxonMobilis preparing to open Europes first large-scale Group II plant, at the companys refinery in Rotterdam, with capacity to produce an estimated 1 million t/y of Group II oils. The company is also expanding its Group II facility in Singapore, which could result in increased exports to Europe.

According to Arguss estimates, global Group I base oil production capacity decreased from 29.2 million t/y in 2007 to 23.3 million t/y in 2018. Meanwhile during the same time period, Group II and III capacity rose by almost 16 million tons per year, Caulfield said. This means some regional markets are experiencing an oversupply of Group II and Group III base stocks.

Producers in these regions are looking for high-volume export markets to send their excess products and to keep their domestic prices firm, she said. And to do this theyre looking at the European markets.

Caulfield said European base oil producers and lubricant blenders are responding to Europes growing Group II base oil supply in a variety of ways.

Group I producers are already adapting strategies, coming up with contingency plans for Group I base oils, she noted. Some of these plans include upgrading their Group I products to Group II or Group III, and modification of certain base oils to grades that may be quite attractive in overseas markets. They see potential export markets for Group I base oil overseas, she said, especially in markets such as Africa and India where that type of base oil is still in high demand.

In terms of European blenders, we are seeing a lot of uncertainty at the moment, she said. Some are looking at additional storage at their blending sites. Do they have space for it? Others are looking at sacrificing some of their Group I storage capacity to store more Group II and III volumes, she noted. Ultimately it seems there is this goal for diversification in terms of [Group II] supply sources, Caulfield said.